When Malaysian Prime Minister Mahathir Mohamad announced in June that he
would step down in 2003, the Southeast Asian nation of 22 million people
was unprepared. Asia's longest-serving ruler, Mahathir has been in office
21 years -- and he has made an indelible imprint on Malaysia's society and
economy. And after his announcement, Mahathir would let slip only the
vaguest hints about his plans for retirement and succession.

In recent months, however, Mahathir and senior officials of the ruling
United Malays National Organization Party (UMNO) have dropped enough hints
for diplomats and economists in Kuala Lumpur to sketch a reasonably clear
scenario for succession. Also clear are the 76-year-old Prime Minister's
plans for the next general election, the makeup of the next Cabinet, and
even a sense of how the next government will manage the economy. While the
overall flavor of Malaysian politics isn't expected to change much, the
impact on Malaysian business -- which Mahathir has shaped through personal
relationships with the country's tycoons since taking office in 1981 --
could be profound.

The moguls whose businesses grew during Mahathir's reign -- and who managed
to survived the Asian financial crisis of 1997-98 -- appear to be
scrambling to prepare for a more competitive business environment.
Infrastructure kingpin Ananda Krishnan, who has investments in industries
that require government licenses, such as cell-phone networks and gaming,
raised $1.2 billion in asset sales in 2002. Securities analysts in Kuala
Lumpur claim that Krishnan is preparing to reinvest the funds outside the
country -- which his aides vigorously deny.

MORE OF THE SAME. And then there's Tengku Mahaleel, CEO of national
carmaker Perusahaan Otomobil Nasional (Proton). The auto company will
remain protected until 2005, when tariffs on cars manufactured in Southeast
Asia will drop to 20% from current levels of as high as 300%. Twelve months
ago, Mahaleel embarked on a three-year project to invest nearly $1 billion
in developing a new engine and models, as well as building a modern
assembly plant on the outskirts of Kuala Lumpur. "We're preparing for a
worst-case scenario," says a Proton spokesman.

Some diplomats and economists, who spoke on condition of anonymity, see
Mahathir's succession and the general election unfolding in the fourth
quarter of 2003, probably in November or December. First, Mahathir will
chair the Organization of Islamic Conference (OIC) summit in October as
planned, marking his final act as Prime Minister and allowing him to "go
out on a high note," says one diplomat. Then Mahathir would step down, with
current Home Affairs Minister Abdullah Badawi, his handpicked successor,
replacing him as Prime Minister.

Malaysia's politics are not expected to change a great deal under Badawi.
"I cannot imitate Dr. Mahathir's style," Badawi said in an interview with a
state-controlled TV station on Nov. 19, "but the objectives will be the
same." Badawi is expected to continue to distance the government from
business leaders whose influence grew through relationships with former
Cabinet members. He's also expected to scale down affirmative-action
policies that some say have been hijacked by the politically connected
elite at the expense of the intended beneficiaries -- poverty-stricken
rural Malays.

THE COMMON TOUCH. In the interview, which diplomats and economists
consider Badawi's most significant public performance as heir apparent thus
far, he emphasized poverty reduction and denounced Islamic extremists as
"spelling a lot of problems for a multiracial country like Malaysia."

The catch is that Badawi's leadership is expected to be temporary. Mahathir
has indicated privately that he's sensitive to widespread criticism of
Badawi as being politically indecisive and of weak character. That's why
Mahathir has put forward current Defense Minister Najib Abdul Razak, who
has a commanding personal presence and is considered polished by Western
diplomats, as Badawi's Deputy Prime Minister. The younger Najib is already
being groomed to succeed Badawi after one or two terms.

The British-educated Najib has spent the last two years rediscovering his
Malay roots in the remote rural constituency of Pahang. He has been
repairing the image problems that gave him only a narrow win in the 1999
general election. "His Oxford accent doesn't play well on the stump," says
another diplomat in Kuala Lumpur. Badawi has not publicly endorsed Najib,
but he's expected to play along with Mahathir's succession plans.

GAME PLAN. In the interim, Badawi hopes to leave his mark on the
government by filling his staff with technocrats rather than politicians,
forming Malaysia's most professional Cabinet to date. One of his first
moves is expected to be appointing a technocrat as Finance Minister. Such a
move would depoliticize a post that the ruling party's power brokers have
used to build up the empires of business cronies.

Already, on Nov. 19, Mahathir appointed Jamaludin Mohamed Jarjis, an
associate of Najib, to be Second Finance Minister. Jamaludin, chairman of
the state-owned electrical power utility and a member of Parliament, is
expected to remain in the next Cabinet under Badawi's handpicked Finance
Minister, and his appointment is seen as a prelude to Najib's appointment
as Deputy Prime Minister.

As Mahathir has suggested in recent public statements, general elections
are expected to be held by the end of 2003. This would allow Badawi to
demonstrate that he's capable of leading UMNO through an electoral victory.
In this scenario, the ruling UMNO Party would hold off on its internal
election until early 2004, at which point Badawi and Najib would be elected
President and Vice-President of UMNO, respectively.

PARTY LINE. That would leave Najib, who at 49 is 14 years younger than
Badawi, in a position to gain support from other party leaders to replace
Badawi after one or two terms. Mahathir -- whose office did not respond to
a request for an interview -- would deviate from this game plan only by
holding the internal party vote before the general election, suggests one
diplomat, and that would be "to avoid an UMNO food fight."

Now that Malaysia's economy is improving and its currency appears to be
undervalued, Mahathir should be able to maintain enough support to keep his
succession plans on course. In September, exports grew 13.5%
year-over-year, thanks largely to higher prices for palm oil and
stronger-than-expected electronics exports to the U.S.

Economists say the ringgit is 7% undervalued, and in the run-up to the
elections Mahathir may decide he has nothing to lose -- and some political
points to gain -- by freeing it from the peg that has held it at 3.8 to the
U.S. dollar for four years. "If we depeg the ringgit, it will become
stronger, not weaker," says Mohamed Ariff, executive director of the
Malaysian Institute of Economic Research. "But the timing is very
important. We need to go back in a position of strength, not weakness."

That's precisely the attitude with which Mahathir appears to be viewing --
and playing out -- his endgame.
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MALAYSIAN PRIME MINISTER Mahathir Mohamad is not going quietly. He has said
he will retire from his post in October, but as he approaches his final
months in office, he is backing several inevitably controversial
initiatives. Taken together, these will address the roots of what he sees
as the greatest threats to Malaysia today: the growth of Islamic extremism
and the racial polarization of the nation's youth.

THE MEDICINE
-- Regulating private Islamic education; folding students into the
national system
-- Revamping education to bring back non-Malays to national schools
-- Ultimately taking religion out of education's mainstream but making it
compulsory for Muslims after school hours
-- National service for some 300,000 male Malaysians a year

In pursuing these goals, the 77-year-old leader will be making a concerted
effort to steer young Malaysian Muslims away from political Islam and
extremism and into the arms of the ruling coalition.

In order to do so, he would roll back some programmes that were put in
place years ago to elevate the status of the ethnic Malays who account for
most of the country's Muslim majority. His mission would entail an
ambitious overhaul of education in Malaysia that, if taken to its
conclusion, would effectively purge Islamic instruction from Malaysia's
daily curriculum.

Most parents in Malaysia enrol their children in a national school system
in which the Malay language is the main medium of instruction and Islam is
part of the curriculum for all Muslims. If they wish, they can instead send
their children to an Islamic religious school, a Chinese school (in which
Mandarin is the medium of instruction), a Tamil school or any one of a
variety of private schools. All nonprivate schools are supported to some
degree by government funding; private Islamic schools also receive some
funding. Mahathir made his priority clear in late November: "National
schools should be the preferred choice," he said. "Besides, mixing with
children from other races would help in national unity."

He has already put a temporary halt to government funding of private
Islamic schools. The next step, according to a top educational adviser to
the prime minister, will be to closely regulate the content of private
Islamic education, which Mahathir says engages in brainwashing."

The plans don't stop there. In early December, Hamid Othman, religious
adviser to the prime minister, said the government had decided to absorb
the estimated 126,000 students studying in private Islamic schools into
national schools to ensure they received "quality education."

Then, on December 12, in an as-yet-unreported meeting convened by Mahathir,
a high-level committee of officials and educational advisers agreed to
begin pushing for a new programme to deal with religion in the national
school system. The plan would relocate religious instruction to special
after-school classes with no political content.

To top off this careful restructuring of the lives of Malaysian youth, the
prime minister seeks to institute compulsory national service for
18-year-old men in an effort to break down racial barriers and keep youth
committed to national ideals.

In the light of revelations in the past year, it shouldn't be difficult to
convince Malaysians they face an Islamic threat. Over the past year
Malaysia has used its Internal Security Act, which permits indefinite
imprisonment without trial, to arrest over 60 people it says are suspected
terrorists. Among those detained are members of the Islamic group Jemaah
Islamiah, which has been accused of a series of terror attacks including
the devastating bombing in Bali on October 12.

The perceived extremist threat is great enough that Mahathir raised it in
his speech to the nation on the Id-ul-Fitri holiday on December 6, marking
the end of the Muslim holy month of Ramadan. He spoke of Jemaah Islamiah's
goal of forcibly creating a pan-Islamic state in Southeast Asia. "They go
to Pakistan . . . purportedly to learn Islam . . . but in fact they want to
learn how to make bombs and rob banks, commit murder and terrorism in
preparation to seize power in this country."

The educational and national service projects could strengthen the status
of Malaysia -- and its image abroad -- as a moderate, progressive Islamic
nation. But any change to the Malaysian educational system is extremely
controversial, and sensitive even to Mahathir's own party, the United
Malays National Organization, or Umno. The party is the pivot of the ruling
coalition, the National Front, which has built its support base on a
multi-ethnic doctrine and depends heavily on the support of the 40% of the
population that is not Muslim.

But Umno has its own, specific Islamic threat to deal with: its
increasingly powerful opposition from the Islamic Party of Malaysia, or
Pas. The party has gained ground in recent elections, and has introduced
Islamic legislation in the two states it governs out of Malaysia's 13
states. It is Umno's strongest competitor for the votes of the majority
Malays. Malaysia has had Islamic private education for more than 100
years. Schools range from prestigious institutions to dilapidated huts with
poor facilities and worse standards. Their actual number and enrolment
figures are uncertain as they are loosely regulated: No licence is required
to open one.

Some government officials say that some schools are breeding grounds for
militant Islam. One highly placed official charges that the "brainwashing"
of students begins at a young age with children taking morning oaths to the
virtues of jihad and martyrdom.

The more likely result of an Islamic education, and its greatest threat in
the view of ruling-party politicians, is that it could breed support for
Pas. The government has accused Pas of "politicizing" Malaysia's Islamic
schools. Pas officials have denied this, and denounced proposals to close
the religious schools.

Mahathir has said that members of his party who sent their children to such
schools had complained that their children had come home asking their
parents "to bring down pictures of the Pharaoh," a derogatory reference to
the prime minister and the photos of him that families of Umno members keep
in their homes.

In October, the government stopped funding for all private Islamic schools
pending an appraisal, Mahathir said, "to find out which are religious
schools and which are political ones."

He has also said that the government does not want to see Muslims
knowledgeable in religious matters only. There are certainly more people
trained in religion than there are jobs for them: When the government
recently advertised for 100 religious teachers for the national school
system, 4,000 people applied.

"It is not necessary for all Muslims to become religious teachers, so there
is no necessity for parents to clamour to send their children for religious
education," Mahathir said in November.

But Islamic schools continue to be popular, in part because they serve a
desire among Muslim parents to give just such an education to their
children. The government estimates that at least 15,000 of the Muslim
children who are pursuing private Islamic education do so because their
parents find the national curriculum "too secular."

According to a senior government official, Mahathir's top education
committee on December 12 tentatively approved a plan to adopt on a national
level what southern Johor state has done for decades: There, all pupils go
to school in the morning for "secular" education, and in the afternoon all
Muslims attend at least two hours of closely supervised and regulated
Islamic education. The state spends at least 80 million ringgit ($21
million) a year on Islamic education.

Moving Islamic instruction to special after-school classes may be just one
part of a process of overhauling the national education system. A radical
plan called the Brain Trust Report, commissioned by Mahathir and completed
in October, is meant to redress the divisive impact education has had on
Malaysian youth of different races.

An indication of the growing ethnic divide: In 1964, 98% of ethnic Chinese
children went to Malaysia's national schools; today the number is 5%, the
remainder opting for Chinese or private education. The shift was due in
part to a perceived decline in the quality of national education, and in
part to the switch to the Malay language as a medium of instruction, from
English.

The disappearance of Chinese from national schools has created a cleaving
of the races that begins in primary school. National schools have now
become overwhelmingly Malay. (Of Malaysia's population, 60% are Malay, 32%
Chinese, 7% Indians and 1% others.)

The Brain Trust Report, according to government officials, recommends
sweeping change, from more rigorous qualifications for teachers to a return
to meritocracy and the creation of "elite" schools, which had been
de-emphasized to accommodate a decades-long affirmative action plan for
Malays, who had previously found it difficult to get into top schools.

As national schools became overtly Malay, Islamic studies became part of
the school curriculum -- albeit a small one, comprising four sessions a
week.

The Brain Trust Report "seeks to Malaysian-ize education from its present
Malay-ized status," says a person familiar with the report. He adds that a
high government official told him that over 50% of the plan is likely to be
implemented.

The report only skimmed the issue of religion. Mahathir's educational
committee could also take religion out of the curriculum altogether. Under
the December 12 plan, normal school hours would have no religious material,
but all Muslim students would be required to attend two hours of religious
education each afternoon, either at the school itself or in another
location. Non-Muslims would be offered a choice to study their own mother
tongue or their religion.

And if any youngsters have been led astray or "brainwashed" by a misguided
education, Mahathir wants to introduce mandatory national service for the
300,000 Malaysians who turn 18 every year. "It's the best way to force the
races to mix," says an Umno official. "And it's a good way to shape young
minds." Umno has in the past rejected any proposals for required military
service.

The Defence Ministry will soon begin evaluating plans and getting public
feedback before drawing up proposals for the cabinet to consider. It has
not yet been decided what form military service would take. However it is
done, it will be certainly be very expensive.

With Mahathir's continued dominance of Malaysian politics, he may be the
one man who can push through such controversial plans. "Dr. Mahathir may be
prepared to take on some of Umno's sacred cows," says Michael Yeoh, who
heads a Kuala Lumpur think-tank, the Asian Strategic Leadership Institute.
"He may be the only one who can."

Many Umno members can be expected to oppose the plans for an educational
overhaul on the grounds that they will undo some affirmative-action
measures that have benefited Malays. Pas will likely oppose them on the
grounds that they are un-Islamic.

But some officials seem confident. "These things should have been done more
than 10 years ago," says the person familiar with the Brain Trust Report.
And if Mahathir doesn't get it all done by October, there's always his
successor, Deputy Premier Abdullah Ahmad Badawi. Abdullah has said Umno is
"committed to the projection of Islam in a positive light," and to
preventing extremism from taking root. Whether he can carry Mahathir's
torch remains to be seen. ---